Intangible asset finance
Intangible Asset Finance is the branch of finance that deals with intangible assets such as patents (legal intangible) and reputation (competitive intangible). Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.
In 2003, one estimate put the economic equilibrium of intangible assets in the U.S. economy at $5 trillion, which represented over one-third or more of the value of U.S. domestic corporations in the first quarter of 2001.
One of the goals of people working in this field is to unlock the "hidden value" found in intangible assets through the techniques of finance. Another goal is to measure how firm performance correlates with intangible asset management.
Intangible assets include business processes, Intellectual Property (IP) such as patents, trademarks, reputations for ethics and integrity, quality, safety, sustainability, security, and resilience. Today, these intangibles drive cash flow and are the primary sources of risk. Intangible asset information, management, risk forecasting and risk transfer are growing services as the economic base divests itself of physical assets. Rights to tangible and intangible assets are intangible, and can be traded globally.
A number of intangible asset business models have evolved over the years.
- Patent Licensing & Enforcement Companies ("P-LECs"): These are firms that acquire patents for the sole purpose of securing licenses and/or damages awards from infringing parties. Perhaps the most famous P-LEC is NTP, Inc., which has successfully asserted patents related to email push technology. Another name for a P-LEC is "patent troll," although this is viewed as a pejorative reference. Recently, hedge funds have raised capital for the specific purpose of investing in patent litigation. One such hedge fund is Altitude Capital Partners, which is based in New York.
- Royalty stream securitizers: These are firms that are engaged in the buying and selling of what are essentially specialized asset-backed securities. The assets that are securitized are typically intellectual properties, such as patents, that have been bearing royalties for a period of time. Royalty Pharma is a well known firm that uses this business model, and which has done by far the largest and most high-profile deals in this space. Royalty Pharma handled what many consider to be the first pharmaceutical patent-backed securitization to be rated by Standard and Poors, which involved a patent on the HIV drug Zerit. The other parties involved in the Zerit transaction were Yale (the owner of the patent) and Bristol Myers Squibb.
- Reinsurers: These are firms that use the techniques of reinsurance to mitigate intangible asset risks. In the same way that some firms issue cat bonds to mitigate the risks associated with extreme weather, earthquakes, or other natural disasters, firms exposed to substantial intangible risk can issue "intangible asset risk-linked securities" that transfer intangible risk to hedge funds and other players in the capital markets with a sufficient appetite for risk. Steel City Re, which is based in Pittsburgh, is a thought leader regarding the use of risk transfer techniques to protect and recover intangible asset value.
- Market makers: Firms that are working to provide more liquidity to the market for intellectual property. Early market makers offered on-line intellectual property exchanges where buyers and sellers could exchange rights in licensed intellectual property, usually patents. On April 22, 2008, Ocean Tomo reported that it had transacted approximately $70 million in its IP auctions across Europe and the United States. In 2009, The Intellectual Property Exchange International (IPXI), headquartered in Chicago, will begin operations as the world’s first stock exchange with an intellectual property focus.
- Investment Research Firms: Companies that provide specific advice to investors on intellectual property issues. Recently, hedge fund managers have been hiring patent attorneys to follow and handicap outcomes in high-stakes patent cases.
- 1997: David Bowie securitizes the future royalty revenues earned from his pre-1990 music catalogue by issuing Bowie Bonds.
- 2000: BioPharma Royalty Trust completes the $115 million securitization of a single Yale patent with claims covering Stavudine, which is a reverse transcriptase inhibitor and the active ingredient in the drug Zerit. This was the first publicly rated patent securitization in the U.S. At the time of the deal, Bristol Myers Squibb had the exclusive rights to distribute Zerit in the U.S. Not long after closing slow sales of Zerit along with an accounting scandal at Bristol Myers Squibb triggered the accelerated and premature amortization of the transaction. Many observers believe that this deal was ultimately unsuccessful because of a lack of diversification as it involved a single patent and a single licensee.
- 2005: UCC Capital Corporation securitization of BCBG Max Azria's royalty receivables generated from worldwide intellectual property rights worth $53 million. This transaction is recognized as the first "whole company securitization" involving primarily intangible assets. UCC Capital Corporation was founded by Robert W. D'Loren, and was acquired by NexCen Brands, Inc. in 2006. NexCen sold substantially all of its assets to Levine Leichtman Capital Partners in 2010.
- 2005: Ocean Tomo holds its first live IP auction. Although proceeds from the first auction were unremarkable, the relative success of the Ocean Tomo auctions that followed showed that the live auction is a reasonably viable business model for monetizing intellectual property.
- 2006: Marvel Entertainment's film rights securitization in conjunction with Ambac Financial Group to provide a triple-A financial guarantee on a credit facility for Marvel backed by a slate of 10 films to be produced by Marvel Studios and intellectual property related to some of Marvel’s most popular comic book characters.
Government, societies, think tanks, and other non-profits
On June 23, 2008, the United States National Academies hosted a one-day conference in Washington, D.C. entitled "Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth."
The Intangible Asset Finance Society provides a forum for finance, innovation, legal and management professionals to discover better ways to create, capture and preserve the value of intangible assets.
The Athena Alliance is a non-profit organization dedicated to public education and research on the emerging global information economy. On April 16, 2008 it published a widely circulated working paper on the topic of intangible asset finance.
- "A Trillion Dollars A Year In Intangible Investment," Leonard Nakamura in Intangible Assets: Values, Measures and Risks at 28, Hand & Lev, Oxford University Press (2003).
- Gio Wiederhold; Valuing intangible Capital, Multinationals and Taxhavens; Springer Verlag, 2013.
- "A seller's market," The Deal, September 5, 2008
- "Avoiding Transaction Peril," Heller et al., in From Ideas to Assets: Investing Wisely in Intellectual Property at 487, Bruce Berman, John Wiley & Sons, 2002
- Steel City Re
- Ocean Tomo Press Release April 22, 2008
- NexCen Press Release, May 13, 2010
- Ambac's press release, 2006
- "Intangible Asset Monetization: The Promise and the Reality"
- Rembrandts In the Attic: Unlocking the Hidden Value of Patents
- "When Balance Sheets Collide With the New Economy," New York Times, September 9, 2007
- "IP-Focused Hedge Funds Launch Amid Market Volatility", Dow Jones, April 29, 2008
- "Hedge Fund Spies in the Courtroom, IP Law & Business, May 10, 2007
- Intellectual Asset Management Magazine Blog